Wednesday, February 2, 2011


Before I start this post, let me state that I fully realize the difference between confidence and ignorance.  Ignorance is spinning the data to support your belief.  It's ignoring any data that does not conform.  Confidence is believing in something.  It means trusting your judgement and research when the mob is telling you something else.

The economy is really based purely on confidence.  If consumers are confident in their job they will invest in a home, purchase some discretionary items.  Confident employers will invest in capacity, hire employees.  If confidence is lacking the contrary will happen. Think about the 2008 recession.  The yield curve was positive and predicting growth but in an instant confidence rolled over.  Commercial paper and other credit markets dried up. Companies scaled back staff, cut costs.  The economy for lack of confidence came to a standstill.

Confidence is really all the government has right now.  Over two years after a recession, the economy still cannot function on its own.  It needs government stimulus and confidence in the form of questionable data.   If the economy was so strong then ask yourself why the following happened:

  • On February 1, Kansas City Fed President  Thomas Hoenig said in a speech that if the economy doesn't show signs of improvement QE2 will be expanded beyond June.  The data today "tells" of an improving economy but these words contradict that.

  • Why Q4 GDP used a price deflator of .3% where as the import component used 20%.  The BEA admitted to higher inflation costs in a component of GDP and a lower value on overall GDP.  The result is an overestimation of true growth.

Right now an honest assessment of macro data tells a completely different story behind the headlines.  Manufacturing data has been solid, I will admit.  But an underlying trend of rising producer prices, input costs tells a very different story from a sustainability standpoint.  Employment data also has been weak and in the case of a recent 9.4% unemployment rate, very questionable.  

I have no idea how much longer this market will rise.  It has been fueled by QE and the confidence spin.  In the words of George from Seinfeld "It's not a lie, if you believe it." The longer equities rise, the larger the group think becomes.  I am confident in the outcome from a macro standpoint.  At some point this economy will be forced to stand on its own legs and it will fail.  I will continue to be honest in studying the macro trends and the government reports but until that changes, I will not be forced into group think.  I'll leave you with a great quote I read recently.

The more we do to you the less you seem to believe we are doing it


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